Fixing, Privatizing, Replacing Social Security

October 15, 2023November 19, 2023 George Noga

Fixing, Privatizing, Replacing Social Security

Replace Social Security with American Birthright Accounts

GEORGE NOGA
OCT 15, 2023

This post analyzes three alternatives for Social Security: (1) fixing it; (2) privatizing it: and (3) replacing it with American Birthright Accounts, or ABAs. This post is a tour de force about Social Security and almost everyone will be surprised by what follows.

Fixing Social Security

Contrary to most beliefs, fixing Social Security (“SS”) is not rocket science. The following measures should bring SS into long-term balance.

Gradually increase the full retirement age to 70 and the early retirement age to 65. Life expectancy has increased by 15 years since SS was first enacted.
Index the full and early retirement ages to future increases in life expectancy.
Change the index used for COLAs. The current index is based on wages and not costs. This change saves 1% each year – a humongous amount over many years.
Make COLAs one percentage point less than the index until SS is in balance.
Consider means testing benefits. I oppose this, but it may be necessary politically. Either way, this will not make much of a difference in the numbers.

All these measures will be implemented eventually because there are no other choices. Similarly, Medicare will be converted to a premium support model and Medicaid will be block granted to the states. Once again, there simply are no other viable options.

Privatizing Social Security

This option is better than fixing SS but – as you soon will see – is not as good as American Birthright Accounts. The main points about privatizing SS are:

Each person can choose between receiving current SS or a private account.
Privatization would be offered only to persons aged 55 or younger.
Funds would be invested in professionally managed and diversified global index funds and would not be accessible to beneficiaries until after retirement.
Estimating the one-time (gradual) transition cost is dicey; the last reliable estimate was $1 trillion and that was many years ago.¹ Even if the cost has increased to $2 trillion, privatization is worthwhile. That is equal to only one year of 2023 federal deficits – for which we have little or nothing to show.
The return on private accounts would be much higher than the 1.2% on SS.
Everyone owns his private account; the value of a median SS account is $400,000 to $500,000 at retirement – double that for a family with two wage-earners.
Private SS accounts are personal property just like any other asset. In a family with 2 wage-earners, nearly $1 million could be passed on to heirs.

Privatization is a light year better than fixing SS. The main criticism levelled by critics is private accounts are too risky. Barack Obama (following the stock market plunge of 58% in 2007-2009) said of George W. Bush’s 2005 plan to partially privatize SS:

“If (Bush) had his way, millions of Americans would have had Social Security tied to the stock market; they would have watched as their nest egg disappeared before their eyes.”

Fortunately, a study was done by the AEI² and published by Forbes Magazine³ that debunked Obama’s economic illiteracy. The Biggs study ran 100 simulations, and the worst case was that a worker, who began a private account at the very worst time, would have seen benefits reduced by less than 1% compared to SS. However, that same worker would have come out far ahead by virtue of ownership of the account.

Replacing Social Security with ABAs

I created the concept of American Birthright Accounts and first posted about it 5 years ago. ABAs could make every child born in the USA an after-tax millionaire at retirement and in today’s dollars. I am not flooding you with numbers, but all the proper computations have been made. ABAs would operate as follows:

At birth every child receives a professionally managed and diversified tax-fee account invested in global index funds funded by the government for $5,000.
Neither ABA beneficiaries nor employers are required to use their own funds.
An additional $500 per year until retirement would be added by government.
The account grows an average of 6% to 7% annually net of inflation. This is in line with the performance of markets over the past 100 years.
Prior to the full SS retirement age, the account will grow to over $1 million.
The account owner draws $5,000 per month tax-free upon retirement, $10,000 for a two-person household. This is equivalent to $150,000 per year taxable.
A couple could bequeath $2 million or more to their children or heirs.
The cost to the government is an infinitesimal part of the federal budget.⁴

ABAs compared to Social Security

A worker on Social Security earning the median income receives a real return of 1.2%. Upon retirement, the worker gets $13,000 per year after tax. Upon death there is nothing remaining. A person has to work many years to qualify for benefits.

The beneficiary of an ABA account has an entitlement by virtue of birthright, whether or not part of the workforce. Upon retirement everyone draws $60,000 per year tax-free and there is over $1 million remaining to leave to their heirs.

The power of markets versus the torpor of government

Aside from the breathtaking financial benefits of ABAs versus SS, there are profound social benefits. ABAs enable all Americans to participate in future global wealth generation and go a long way toward eliminating inequality. ABAs succeed due to the power of markets while SS fails due to the fecklessness of government.

ABAs would turn workers into nascent capitalists and give them a huge stake in the market economy. Progressives oppose privatizing SS precisely for that same reason, i.e. fear of turning workers into free-market capitalists. They don’t want to make everyone rich because it doesn’t comport with their nihilistic class warfare mantra.

The creation of American Birthright Accounts would be the most transformative economic legislation in US history, even eclipsing the Homestead Act of 1868 that made landowners out of working-class Americans. It would give a new and profound meaning to the words: Born in the USA!

1 – Estimate published by The Heritage Foundation

2 – American Enterprise Institute by Andrew Biggs, a resident scholar and former deputy commissioner of the Social Security Administration

3 – Forbes Magazine edition of April 13, 2009

4 – There were 3,661,000 US live births in 2022. Allowing for premature deaths, there would be 3.2 million new ABA beneficiaries. At $5,000 per account, it would cost $16 billion – equal to three-tenths of one percent of federal spending. The $500 per year varies with the number of accounts but at its maximum (in 64 years) would be $100 billion, or 1.8% of federal spending in 2023 dollars.

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

Decade Horribilis: The 2030s

June 11, 2023June 18, 2023 George Noga

The next decade will be the perfect storm for America
GEORGE NOGA
JUN 11, 2023

On January 1, 2022 I distributed a post entitled Annus Horribilis in which I wrote that the coming year would contain a phantasmagoria of horrors. My predictions included:

Russia invades Ukraine; China and Russia form an entente
Iran races toward nuclear weapons and North Korea resumes missile testing
The US has double-digit inflation, uncontrolled spending and huge deficits
Biden is non compos mentis; his administration, chosen solely on identity, would open the borders, cripple US energy production and promote lawlessness.

The only major prediction I muffed was that China did not invade Taiwan. Read this post for yourself on our website: www.mllg.us. My 1/1/22 post was the only time in 15 years of blogging I made any such predictions. That I was prescient is not attributable to any special insight or clairvoyance; the predicates were in plain view and many of the dots already were connected. And so it is again for the next decade.

The 2030s will be a perfect storm for America

I derive no pleasure whatsoever from these predictions and hope, against hope, that somehow I am wrong. But again, all the predicates are hiding in plain sight and all the dots are starting to connect – just as they did for 2022.

The debt (spending) crisis reaches critical mass and goes thermonuclear. Government no longer can borrow money because it is incandescently obvious to all there will be no repayment. Initially, the Fed will print money, but it will lead to runaway inflation and $100 trillion banknotes. The ensuing Great Debt Crisis will be on a par with the Great Depression and last for a (lost) generation.
Social Security and Medicare go bust. This is a no-brainer; even the trustees for these programs warn the funds will run out in the early 2030s. The government will use general revenues to prop up current benefit payments while making significant reductions – mostly applicable to future beneficiaries.

Geopolitical risks abound. China, which will have taken Taiwan long before 2030, will be the undisputed hegemon in the Asia-Pacific theater and will replace the US for global leadership. While the US is mired in the throes of its Great Debt Crisis, North Korea may invade South Korea and a nuclear-armed Iran will become the hegemon in the Middle East and threaten Israel. Nuclear proliferation will spread to Japan, South Korea, Saudi Arabia and others.
Because of the Great Debt Crisis, the ability to defend the homeland and our allies is severely compromised. America’s greatest strength is a strong economy and ours will be in critical condition. We will be lucky to avoid a major war.
The US dollar no longer will be the world’s reserve currency. This greatly exacerbates the Great Debt Crisis and forces Americans to pay more (much more) for most of the products they buy – especially energy.

America in the 2030s

Imagine a world with the USA mired in the 20-year Great Debt Crisis with the loss of social cohesion, breakdown of law and order, bankrupt Social Security and Medicare, the Yuan as the world’s reserve currency and facing multiple geopolitical threats with a greatly depleted defense. What if China, Russia, North Korea and Iran formed a compact and threatened us simultaneously in several different places?

Americans chose to worship false gods

How did America get to such a desperate place? We refused, and continue to refuse, to control our spending; we kicked the can down the road until there is no road left. But, most damning of all, we ignored The Gods of the Copybook Headings¹, i.e. the collective wisdom humans acquired since they first came down from the trees.

We chose instead to listen to the false gods of wokeness, climate madness, identity politics and lawlessness. They (politicians) promised us it would be different this time; they promised us the moon was Stilton. They promised us the real problem was white supremacy. They promised us we could spend without restraint, worship on the altar of climate madness and wokeness and let criminals go free.

Throughout the ages, whenever men have worshipped false gods, inevitably the Gods of the Copybook Headings, with terror and slaughter, return!

1 Poem: The Gods of the Copybook Headings by Rudyard Kipling, October 1919.

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

Cabbages, Kings, VATs and IRAs

May 7, 2023May 13, 2023 George Noga

Uncle Sam is coming for your IRA

GEORGE NOGA – MAY 7, 2023

My last post (April 30) about the spending crisis showed the government would need $900B in 2023 to stabilize the Debt/GDP ratio at around 100%. The national debt held by the public is $25T, soon to be $30T. Not uncoincidentally, US retirement assets including IRAs, 401(k)s and pensions total $30T – more about this infra.

When the spending crisis attains critical mass in a few years, the government, facing the mother of all crises, will desperately seek honeypots; after all, why let a ginormous crisis go to waste? After racking my brain, I can identify only three honeypots big enough to matter; these are retirement assets, a carbon tax and a VAT.

Raising Tax Rates and Cutting Costs Won’t Work

First, we must eliminate the two most obvious honeypots – higher marginal income tax rates and less spending; neither is big enough . The income tax is organically incapable of raising more revenue because of Hauser’s Law, which states that income tax revenue, regardless of tax rates, always is 18% of GDP – marginally higher or lower during booms and busts. Whether tax rates are 92% as they were in the 1950s, or 28% as they were under President Reagan, the government collects the same 18% of GDP. Note: Hauser’s Law works because people adjust their behavior as tax rates change.

It is possible to cut spending, but not near enough to come close to freezing the debt ratio. Reductions of $900B are needed and the only way to get there by cutting costs is to savage Social Security, Medicare and most other government programs. To realize savings of $900B would require 30% across-the-board cuts in all programs including Social Security and Medicare, excepting only defense and interest on the debt.

Value Added Tax (VAT)

For a VAT to raise $900B, the rate would have to be around 20% and would cost $7,000 per year per household. Since lower-income households likely would be exempt, the effective cost would exceed $10,000 per year per affected household. Politicians have proposed VATs before. Paul Ryan’s Roadmap contained a VAT as did Herman Cain’s 9-9-9 plan; one of those nines was a VAT – and those were putatively conservative Republicans. If you think a VAT is farfetched, think again. Politicians like VATs because they are stealth taxes, embedded in everything we buy.

Carbon Tax

A carbon tax, part of a cap and trade scheme, comes with political advantages. It also is a stealth tax, passed on to consumers by utility companies. It can be touted as a way to combat global warming and it can be targeted at higher income cohorts for class warfare. A carbon tax can start out small and easily be ramped up.

IRAs, 401(k)s and Pensions

The biggest (by far) honeypot is pension assets. The Secure Act got the camel’s nose under the tent by requiring annuities be offered in all retirement plans – a precursor to mandatory annuitization, whereby government seizes IRAs in exchange for a government annuity. Think this is farfetched? Poland, Hungary, Ireland, Bulgaria and France, through one artifice or another, have seized money from pension assets. In the end, Uncle Sam, like Willy Sutton, must go where the money is; that’s your IRA.

Putting it All Together

As the nation is rent amidst the chaos and anarchy of the spending crisis, Americans will be of a mindset to go along with any government actions offering hope. Likely there will be a combination of actions such as listed below. Remember, it must amount to at least $7,000 for every household, every year with no ending point.

Enact a VAT at a modest teaser rate and then rapidly jack up the rate
Attack pension assets, such as requiring a portion be invested in government bonds, capping the size of accounts and forced annuitization
Pass a (cap and trade) carbon tax that will cause power bills to skyrocket
Make small, mostly cosmetic and back-end loaded, spending cuts
Raise Social Security age to 70, convert Medicare to a premium support model

Sadly, it won’t be enough; at best, it buys us a few more years. Even if we find the $900B to freeze the ratio, we have not solved the problem; we have merely stopped it from getting worse. Moreover, the added taxes will gravely harm economic growth; we will be caught up in a vicious circle. America will become a no-growth European-style welfare state; our country will be forever changed and our children and children’s children will be relegated to lives of quiet desperation.

Thanks for reading More Liberty – Less Government!

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

The best way to minimize inequality . . . Privatize Social Security Immediately

September 12, 2021September 12, 2021 George Noga

Private Social Security benefits everyone at all times – even when markets melt down.

The best way to minimize inequality . . .

Privatize Social Security Immediately

By: George Noga – September 12, 2021

With one stroke, government could virtually eliminate wealth inequality and most income inequality. Economists calculate the current Social Security program yields about 1% per year and when the beneficiary dies his/her heirs get absolutely nothing. In recent decades, private accounts invested in balanced index funds have returned 7% net of inflation; moreover, when the beneficiary dies the heirs inherit a fortune.

To illustrate, $100,000 compounded at 1% for 35 years results in

$140,000; compounded at 7%, it yields over one million dollars.

George W. Bush proposed privatization but progressives demagogued it mercilessly. Barack Obama said, “If Bush had his way, millions of Americans would have had their Social Security tied to the stock market; their nest eggs would have disappeared before their eyes.” Obama demonstrated his economic ignorance. Forbes magazine published a study by the American Enterprise Institute (AEI) written by a former commissioner of the Social Security Administration; the study proved that privatization is beneficial even if initiated right before the stock market plummets by 54% as in 2007-2009.

Under the Bush plan, only workers under age 55 were eligible for private accounts and no retiree could possibly have lost money. The absolute worst case in the AEI study was for a worker who started a private account in 1990 at age 53. That worker would have received benefits seven-tenths of one percent less that Social Security. However, the worker would still have come out way ahead because he owned the account. Even when markets melt down 54% at the worst possible time, private accounts are better.

American Birthright Accounts

The best plan is to replace Social Security with America Birthright Accounts or ABAs. We at MLLG invented the ABA concept and published it in in our posts of 5/20/18 and 6/17/18. These are easily available on our website: www.mllg.us. Following is a summary of American Birthright Accounts as we first proposed them three years ago.

Government creates a tax-free ABA at birth for every child born in America and funds it for $5,000. Each year until retirement, government adds $500. The account is professionally invested in a diversified portfolio of global index funds. Since 1930 markets have increased 7% yearly net of inflation and despite meltdowns. When the ABA beneficiary is age 65, the account exceeds $1 million and generates $6,000+ per month tax-free and in today’s dollars. A retired couple, both with ABAs, receives $150,000 per year tax-free and would have $2+ million to bequeath to heirs.

American Birthright Accounts make every American a millionaire

ABAs are affordable. There were 3.6 million births in the USA in 2020 – about 3.5 million net of early mortality. This equates to an annual cost of $17.5 billion for the initial $5,000 and $1.75 billion for the $500 per year. The average cost for the first 10 years is $25 billion per year; in year 11 the cost is $35 billion and increases by $1.75 billion every year thereafter. This is less than one-half of one percent of the budget.

Private Social Security and ABAs Minimize Inequality

Creating ABA accounts, or even privatizing Social Security, would go far in eliminating inequality in America. It would make all Americans stakeholders in our market economy. Private accounts succeed due to the power of markets whereas Social Security fails because of the evils of government. Progressives oppose making everyone rich because it would eliminate their dependence on government.

ABAs would cost $250 billion over the first 10 years and easily would fit into the infrastructure bills now proposed by progressives. It would cost a mere 5.5% of the $4.5 trillion and it would give an entirely new meaning to “Born in the USA“.

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Our next post is about all the new taxes in your future – thanks to Biden.

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American Birthright Accounts: Readers Respond

June 15, 2018June 10, 2018 George Noga

This post compares American Birthright Accounts to Social Security and responds to readers’ questions about seeming too good to be true.

American Birthright Accounts: Readers Respond

By: George Noga – June 17, 2018

Reaction to our May 20th post about American Birthright Accounts (“ABA”) was extensive and spirited. If you missed the original post or wish to reread it, you easily can access it on our website: www.mllg.us; however, we provide a summary in the next two paragraphs. Reader responses (addressed herein) centered on (1) comparisons with Social Security; and (2) questioning whether ABAs were too good to be true.

American Birthright Accounts are an original MLLG idea, although the name is borrowed. ABAs are simple and affordable. Every child born in the USA receives a professionally managed, tax-free account funded by government for $5,000 at birth and $500 per year thereafter until age 65. If the account grows at 7% net of inflation, which mirrors the average annual performance of markets since 1930, the account will exceed $1 million at age 65 and generate $6,000 per month of retirement income.

A retired couple, both with ABAs, receives $12,000 a month tax-free, equivalent to $200,000 per year taxable. They own their own accounts and have $2 million to bequeath to their heirs – all tax-free and in today’s dollars. The cost to the government is equal to one-half of one percent of the federal budget, or 25% of what we will spend this year just on food stamps. ABAs also would vastly reduce inequality in America!

How Do ABAs Compare with Social Security?

An American working from age 20 to 67 earning the median income ($60,000) pays $430,000 into Social Security (“SS”) and receives a real (net of inflation) rate of return of 1.2% (per Heritage Foundation) resulting in a notional value of $738,000 at retirement. The average SS beneficiary receives $16,000 per year, or a rate of return of 2.2%. Because SS is 85% taxable, the benefit is equivalent to $13,000 after tax – equal to a real return of 1.8%. Finally, SS benefits are unsustainable at their present level and after circa 2030 beneficiaries can expect to receive only 75% of present benefits.

Let’s put SS side by side with an ABA. The average cost of SS is $430,000, for an ABA it is only $37,500 ($5,000 at birth and $500 a year for 65 years). Average SS benefits are $13,000 per year after tax; for ABAs the comparable number is $72,000. At death, the value of your SS account is zero, zilch, nada; the value of your ABA is over $1 million. Everyone benefits equally from an ABA, whereas the benefits vary wildly for SS. I could go on ad infinitum in this vein, but I believe you get the drift.

Are ABAs Too Good to be True?

Some readers had trouble with the mathematics of ABAs, wondering how it is possible for everyone to be a millionaire? The math is straightforward; the initial $5,000 increases to $435,000 and the $500 per year grows to $573,000 for a total of $1,008,000, all computed from standard compound interest formulas. ABAs compound from birth for 65 years, whereas SS doesn’t begin until 20 years later. ABAs grow at a market rate, while SS grows at the much lower short-term government bond rate.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

There is a much larger lesson here. ABAs succeed due to the power of markets, while SS fails because of the evils of government. Progressives oppose privatizing SS, fearing market success will turn workers into nascent capitalists by giving them a big stake in the free-market economy. Liberal poseurs oppose making everyone rich because it doesn’t fit their nihilist, tribalist, class warfare, identity group narrative.

Next up: The Supreme Court decision to permit sports betting.

The Panacea of Economic Growth

November 1, 2014January 28, 2016 George Noga

By: George Noga – November 1, 2014

Throughout its 238 years, the US economy has grown by over 3.0% annually, although data for the early years are problematic. For the 60 years from 1940 to 2000, the US economy grew at a rate of 3.6%. For the following 14 years from 2001 to the present, GDP grew by 1.8%, exactly half that rate. If growth remains tepid, Americans will not recover the ground they lost and their children and grandchildren will, for the first time, be worse off than the previous generation.

America has transmogrified into Europe which is in permanent recession due to its failed economic policies. Even stalwart Germany is beginning to stagnate. France is destroying its economy in a fit of socialistic angst. Italy has a lower GDP per capita than it had 15 years ago. Meanwhile in Brussels, Jean-Claude Junker continues to strangle EU countries with bureaucrats and regulations. In Europe a 2% growth rate is seen as optimistic, 1.5% as acceptable and no growth as possible. The average European in one generation fell 25% behind the average American due solely to differences in GDP growth. As I wrote last month, just in the past 5 years, the average American has been impoverished by 17% due to the low growth rates coming out of the recession compared to the historic growth rates in similar times. In short, we already have become like Europe although Europe continues to plumb ever new depths. We are well along in suffering a lost decade on the path to a lost generation; our progeny, like Europeans today, will lead lives of quiet desperation.

“Failure to grow America’s economy is a choice; decline is not inevitable.”

Failure to grow our economy is a choice; decline is not inevitable. It is a choice made by our political leaders solely because they prefer to demagogue inequality, class warfare and corporate profit for perceived electoral gain. It is a choice made by the media because they are lazy, economically illiterate and prefer to flog dead camels. It also has been a choice made by ordinary Americans in the voting booth for all of the aforementioned reasons advanced by politicians and the media. There are strong signals however that ordinary Americans now are beginning to want economic growth.

Economic Growth as the Panacea

As trumpeted by the headline of this blog post, economic growth is a panacea; indeed, it is the only solution for every problem (real and perceived) that we face today and for the coming generation. It is apropos that Panacea is the Greek Goddess of healing because strong economic growth will heal everything; to wit:

The crisis of spending, debt and deficits: A sustained period of strong economic growth (combined with some spending restraint) will enable the US to restore fiscal balance and to stabilize its debt thereby gradually lowering the Debt/GDP ratio to its long-term historical level of around 30%.
Climate change and environment: If in the distant future climate change causes some issues, the best antidote is a vibrant economy that will easily enable us to spend whatever is needed to mitigate any such problems. Only countries with strong economies can afford to spend copiously on the environment.
National security: The single greatest asset (weapon) we possess for our national security is a growing, resilient economy. This enables us to spend whatever is necessary to deter any possible adversaries and to defend ourselves should that be necessary. Weakness invites aggression and fosters terrorism.
Jobs, poverty and inequality: It is economic growth, not government, that creates jobs. It is sustained growth that fulfills the American dream and eliminates poverty; moreover, growth is the great equalizer.
Unfunded mandates: The USA is facing $350 trillion (over one-third of a quadrillion) in unfunded commitments in the next 50 years for Social Security, Medicare, government pensions, Obamacare and other programs. Absent a high rate of growth, these promises not only cannot be kept but will require drastic reductions in programs.

Recipe for Economic Growth

Okay, so economic growth is the panacea; what must we do to achieve it? The answer is straightforward and attainable. If we do the following we will achieve vigorous, long-lasting economic growth.

Political consensus: Probably the single most difficult hurdle for achieving growth is reaching a political consensus. Politicians and the media must agree to pursue policies that maximize growth and agree to stick with such policies for the long term. They can continue to argue over how to divide the wealth that results; that is what politics is about. Absent some consensus however, achieving sustained growth becomes problematic.
Tax and fiscal policy: Taxes (personal and corporate) must be reduced, simplified and stable. People and businesses must be able to plan ahead and certainty about taxation is indispensable to investment and job creation. In the same vein, spending needs to be restrained.
Eliminate uncertainty: Business hates uncertainty; it stifles planning and results in gridlock. There needs to be a broad and sustained political understanding about taxes, regulations and new initiatives.
Sound money: The Fed should focus only on maintaining sound money and fighting inflation. A strong, stable and sound dollar are indispensable for a vibrant economy.
Regulation: The economy is being strangled by regulation and litigation. We need to have a moratorium on new regulations while we gradually reform and roll back existing ones. Our tort system needs to be reformed.
Energy: We should develop every possible energy source including ANWR, offshore and shale and natural gas on federal and state lands. We should export LNG immediately from many terminals and, of course, construct the Keystone XL Pipeline. Such a policy will create jobs, make us energy independent, stimulate the economy and, importantly, prove to be a potent weapon in keeping Putin and Russia in check.
School choice: I include this because educated, trained workers are a potent economic resource. Further, school choice will bring about more equality and reduce poverty. It also is a panacea.

The choice is ours. We can continue on our present slow growth trajectory which will condemn future generations to a downward spiraling economy and reduced living standards; they will experience untold miseries as the crisis of spending, debt and deficits culminates in a meltdown. They will inhabit a Clockwork Orange nation drowning in taxes, regulation and uncertainty. They will have part time jobs for low wages. At best they will collect 65% of the present Social Security benefits deferred until they are age 70; Medicare and Obamacare (also age 70) will be busted; health care rationed and long waits common for poor treatment. They will inherit a volatile, dangerous world where nuclear weapons proliferate, a revanchist, aggressive Putin-led Russia and all without the resources for adequate national defense.

Or, we can make a different choice; we can choose to reject decline and to embrace high-growth policies. This would lead to a virtuous circle of better education, abundant and cheap energy, and to a far safer and more secure nation and world. It would result in fixing the debt crisis and funding all the promises we have made for the future. Most of all, it would help ordinary Americans. As year after year of high growth enriches America, the politicians can fight over how to best divide up this cornucopia – including addressing any inequality issues.

Firstoff however, we must make the right choice. This gets us right back to the heart of Alexander Hamilton’s question: “Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.” Is America today still capable of putting politics aside when self preservation is at stake? Or, do we heed the Siren song of politicians advocating failed ideologies, searching for Utopias and demagoguing political correctness, class warfare and inequality?

Into the Eye of the Debt Hurricane

September 20, 2014January 28, 2016 George Noga

Update on the Crisis of Spending, Debt and Deficits
By: George Noga – September 20, 2014

By some metrics the debt storm has abated. Compared to earlier deficit projections published herein, the USA is slightly better off, with the difference due entirely to the massive Obama tax increases. The deficit this FY ending September 30 is $500 billion, equal to 3% of GDP; meanwhile GDP is increasing around 2%, meaning the deficit is growing only slightly faster than the economy, a marked improvement. However, great damage already has been done; moreover, we are merely in the eye of the debt hurricane – it may appear sunnier at the moment, but the deficit storm will soon resume with even more ferocity and we will all be blown away.

The Seen and the Unseen

The US economy already has sustained massive body blows. The reason we don’t clearly see the damage is due to the difference between the seen and unseen – or, more to the point, the difference between the reported and unreported.

In past recoveries following major recessions, the US economy has grown by an average of 5% for the subsequent 5 years; this results in a compound growth rate of 27.6%. Instead, we have experienced 2% compound growth yielding only 10.4%. The difference of 17.2% is the growth deficit. Simply, the average American today is 17% worse off than he/she should be; but we don’t see what should be; we only see what is. Nevertheless, the reality is that every American has been impoverished by 17% just during the past 5 years.
We see the increase in federal tax revenue and the concomitant reduction in the deficit. Unseen are the massive tax hikes that produced the revenue. Individual tax brackets increased with the top rate going to 39.6 % – a 13% increase. Investment related taxes were savaged with capital gains rates going from 15% to 23.8% (59% increase) and dividends from 15% to 43.4% (289% increase). Medicare taxes increased 62% and the upper limit was removed. There was a new surtax on investments of 3.8% and the death tax went from zero to 40%. New individual and employer Obamacare taxes took effect along with scores of other Obama tax hikes. The 35% corporate tax rate (world’s highest) is responsible for shifting jobs and investment abroad and businesses keeping $2 trillion overseas. The unseen effects of these massive tax increases will hobble the economy until abnegated.
We can see the reduction in the official unemployment rate; what is unseen is the jobs disaster that is America today. There are 12 million out of work, 12 million on disability and nearly 50 million (one in 5 households) in breadlines – err, on food stamps. The labor force participation rate hit a 35 year low. All (net) jobs being created are part time; there are legions of 29ers and 49ers. The true rate of unemployment is 15%, not the 6.2% reported.
We see Social Security and Medicare meeting their current obligations but we do not see the demographic time bomb looming for both programs. There is nothing on earth as certain as demographics; 77 million more boomers will retire (10,000 every day) and begin Social Security and Medicare. Spending on both these programs will grow by 8% compounded – doubling every 9 years. Within 10 years we will spend our entire budget on entitlements and interest on the debt leaving nothing left over for defense or for the rest of the government.
We see interest rates on federal debt hovering around record lows costing only $225 billion currently. We blissfully do not see what the interest would cost given a return to average interest rates, i.e. interest cost would increase $500 billion per year to $725 billion, or triple today’s cost. And that’s the rosy scenario. This is a no-win situation: keep rates low and the economy is grotesquely distorted and savings and investment are savaged or raise rates where they should be and the budget deficit goes thermonuclear.
We see government regulation exploding, uncertainty rampant and the scepter of Obamacare hanging over all of us like the sword of Damocles. We do not see the stultifying effects of all these on job creation and the economy.

Looking at the gestalt paints a funereal picture. Average Americans already are 17% poorer over the last 5 years than they would have been in a normal economic recovery – and they will continue to get relatively poorer and poorer each year without any end in sight. The tax and regulatory burden, particularly on investment, has skyrocketed, halting new investment and job creation. Behind the “official” 6.2% unemployment rate lays a dystopian jobs nightmare; we are turning into a country of part time workers. We are reaping a demographic whirlwind still in its early stage. We are living on the razor’s edge regarding interest rates; we have a Hobson’s choice: ballooning interest costs or maintaining negative real interest rates. Finally, all this exists within a milieu of hyper-regulation, vast uncertainty and, of course, Obamacare.

Current CBO Projections for Spending, Debt and the Deficit

Recently (July) the CBO released its latest forecast. The CBO alternate baseline forecast (its most realistic) assumed the average middle class family’s tax burden doubles over the coming generation; it also assumed no more recessions, wars, terrorist attacks, natural disasters and that interest rates remain low perpetually. Despite these horrific (taxes doubling) and grossly unrealistic assumptions, the results are disastrous. The deficit increases by over $100 trillion and the CBO stops forecasting because it can’t conceive of a functioning economy under those circumstances. And all this, dear readers, is based on an uber-optimistic forecast; the reality is much, much worse!

We have been grazing on the fiscal commons for a long time; the pasture is about to give out and the spring lambs are doomed to a life of quiet desperation. We can muddle through for a few – perhaps several – years with temporizing and half measures. Soon enough time will run out and the ineluctable tipping point (Minsky Moment) will be reached. It will get ugly for an extended period, i.e. a lost generation., Eventually, when we emerge from the rubble, we may get it right again – only because there are no other choices – and America will again enjoy more liberty and less government!

Balanced Budget Amendment No Holy Grail

March 19, 2014April 3, 2016 George Noga

By: George Noga – Updated March 10, 2014

A balanced budget amendment (“BBA”) is favored by 80% of all Americans in the belief it will, once and for all time, force fiscal discipline on the government. They are putting way too many eggs in the BBA basket. Watch out what you wish for. If there is a BBA, all those eggs will end up scrambled into a rather unpalatable omelet.

There are myriad paths through, over, under and around a BBA. In short, it would not be worth the paper it was written on – assuming it can garner two-thirds majorities in Congress and ratification by 38 states. Following is a partial list of ways a BBA could be eviscerated.

A BBA appears simple but is complex. How do you define budget; what does balanced mean; what is a tax? It would be the only part of the Constitution that could be waived.
What are allowable exceptions such as for military actions and natural disasters? There will be escape hatches big enough to drive a truck through. Whatever exceptions are carved out for some things, expect many more of such things. How would waivers work?
How would a BBA deal with economic cycles? Revenues can both skyrocket and plunge from year to year. Are we to slash spending in a recession and be profligate in a boom? How do we define recession and boom? How is a BBA to be managed over the course of an entire economic cycle without opening to door to great mischief?
Lawsuits will tie up a BBA for decades and federal judges will wind up with enormous power to change it. Consider how the federal bench has dealt with desegregation and busing; they still are entangling themselves over 60 years after the initial ruling.
How do we distinguish capital expenditures from annual expenses? Surely, the argument will go, a BBA was not meant to include infrastructure spending that has a life of 50 years. If capital is treated differently, more expenditures will be classified as such.
How do we address off-budget spending such as by Fannie, Freddie, USPS and the Federal Reserve? Who will prevent government from creating scores of new off-budget entities? Do we exempt interest on the debt; what happens when interest rates skyrocket?
Watch out for so-called special taxing districts; these are favorites of local government with 50,000 nationwide. If they are not under the BBA ambit, they will mushroom.
Are Social Security, Medicare, Medicaid and civilian/military pensions to be part of the regular budget? Are they no longer to be considered off budget entitlements?
User fees will sharply increase and the government will be creative in imposing new ones. Be prepared to pay handsomely for everything you get from Washington – how about $100 to file a paper income tax return or $50 to get into a national park?
Loan guarantees will become de rigueur as a way to fund programs off budget. After all, a loan guarantee is not an expenditure – is it?
Instead of direct taxation, costly new regulations will flourish. Rather than spend tax money, Congress will bypass taxes and accomplish the same result through regulation.
The tax code can be used for far more than raising taxes subject to a BBA. It can be larded with tax expenditures, incentives, penalties and all sorts of tomfoolery.
Don’t forget mandates. Since the ObamaCare mandate survived judicial scrutiny, what is to stop government from substituting mandates for taxes or spending? The feds could mandate that states, counties, cities (and even people) spend money not subject to BBA.
A budget can be balanced with tax increases. This would strictly comply with a BBA but tax increases are certainly not what BBA proponents intended.

Reluctantly, I have come to the view that a BBA is not the answer because: (1) we would expend lots of energy (perhaps for naught) enacting a BBA better spent elsewhere; (2) it will not work for all the reasons noted supra; (3) it would beguile us into falsely believing the problem is solved once and for all; (4) many of us would declare victory and move on while the other side would keep fighting; and (5) you can’t take the politics out of politics.

The solution is to remain engaged permanently, albeit this is contradictory to human nature. Once a problem appears solved, we tend to go back about our private business. But big government and its acolytes never stop and neither must we. As seductive as it may seem, a balanced budget amendment is fool’s gold; it is not the Holy Grail.